Dr Benjamin Holdsworth on why even small income increases could force a tax breach
Even though the NHS pay rise has been branded ‘small and insulting’ by the BMA, consultants should be mindful because any increase, however insignificant, can trigger a tax charge on excess pensions’ savings.
As we know, there is an annual allowance which limits the amount of tax-free pension savings each year. The allowance varies for every consultant –the top figure is £40,000, but this may fall to just £10,000 per year for higher earners with the introduction of the tapered annual allowance.
Consultants should be wary of any NHS pay rises received through increments, statutory payments, new management positions or CEA awards.Increased pay equals increased pension ‘growth’ which could easily force a breach of the allowance. Note that excess pensions’ savings above the limit are taxed at up to 45 per cent.
This partial pay rise (which comes mid-way through a year) will also add another level of complexity to the already challenging pay and pension calculations for the annual allowance. To make matters worse, the pay increase does not apply to CEAs which will remain frozen for the time being.
Make sure you are in the best possible position to protect against tax charges by checking that your pay and pensions figures – including any private pensions – are accurate and have been tested against the annual allowance rate applicable to you.
You should request your annual pensions statement from the NHS PensionsAgency without delay. Many of the statements we have seen have contained errors as a result of backdated pay, variable pensionable pay from year to year and/ora change in the number of PAs mid-year. Do not simply trust the figures presented without a thorough check.
Dr Benjamin Holdsworth is director of Cavendish Medical– specialist financial planners for medical professionals in the NHS or private practice. For a second opinion on your finances, please contact us on 020 76367006. www.cavendishmedical.com
The content of this article is for information only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.